Why Spotify And Tencent Music May Swap Stock

It's been reported that Spotify and China's Tencent Music Entertainment Group are in talks to acquire 10% of each other, and should the deal go down, there's no other way to look at it than as a strategic maneuver that has nothing to do with their subscribers. No, this is all about stockholders — actually potential stockholders — as both companies plan to go public soon.

Just to be clear, Tencent Music Entertainment is the music-only side of Tencent Holdings, so Spotify isn't getting 10% of a company valued at more than $500 billion. In fact, Tencent Music is said to be valued at somewhere around $10 billion.

The co-acquisition provides a nice story to tell underwriters and stockholders. Each gets a foothold in a market that it's not currently in, saving millions of dollars in the process. It also saves each from the tough fight for market share that would ensue had they tried to enter each other's territory.

Another potential advantage is that both companies together are much stronger when entering licensing negotiations with major music labels and publishers. For any company with a business based on copyright as music streaming is, licensing is its lifeblood. The licensing agreements are the toughest nut to crack, and ultimately it will be where the profit lies in streaming, so there's greater strength in numbers when it comes to these complex negotiations.

In terms of those numbers, industry analyst Mark Mulligan points out that "Tencent Music has around a third of Spotify’s subscriber base, a fraction of its revenue and half of its market valuation. Yet a 10% swap deal is on the table." As a result of the different valuation prices for each company, Spotify will also see an injection of cash to make up the difference.

This move just goes to show how much of a vital piece China is to Spotify's story. It's the potential revenue from this area that will tweak the fancy of underwriters, given the fact how huge the market is. Tencent Music operates multiple music streaming services in China that have around 700 million monthly active users. That said, only a small percentage currently pay a monthly subscription fee.

The Spotify deal follows an investment pattern for Tencent. The company has made similar small investments in Western companies like Tesla, Snap and Essential Products recently, and even backed the "League of Legends" attraction on Amazon's gaming platform, Twitch. There have also been rumors in the past that Tencent has attempted to purchase Spotify outright, but the offer was rejected.

At this point, the co-acquisition is a win-win for both companies, as it achieves the strategic objectives of each. The only difference is Spotify is looking short-term, while Tencent is looking much further down the line.

- Bobby Owsinski is the author of 24 books on recording, music, the music business and social media. Read excerpts at bobbyowsinski.com